Lone Star Loses Tax Appeal in South Korea

South Korea's National Tax Tribunal on Thursday rejected an appeal by U.S. private equity group Lone Star Funds and ordered it to pay back taxes on profits from the sale of a Seoul office building.

Lone Star filed complaints in March last year against the tax authority's decision to impose back taxes on the fund's 900 billion won (US$975.7 million) sale of the building in 2004 via its Belgium-based affiliate Star Holdings.

"We have unanimously decided to dismiss Lone Star's appeals," the tax tribunal said in a statement, citing a review of documents that found Star Holdings is a "conduit company, which has no practical business operation or is not a beneficial owner of the entity's income and gains."

The tribunal ordered Dallas, Texas-based Lone Star to pay 101.7 billion won (US$110.3 million) in back taxes for the sale. Lone Star said it planned to appeal in South Korean courts.

The tribunal said the purchase of the Star Tower building was regarded as "a treaty purchase" to avoid paying tax.

A treaty with Belgium aimed at protecting against double taxation does not apply in the case and, as the ultimate beneficiary of the sale, Lone Star should pay the tax, the tribunal ruled.

Lone Star had cited the treaty in arguing that it was not liable for tax in South Korea.

"Lone Star respects the National Tax Tribunal's view but is disappointed in this decision and will appeal it to the Korean courts," Lone Star Chairman John Grayken said in a statement.

In a later statement, Grayken said that Lone Star intended to pay the taxes despite the appeal, apparently counting on a refund if the appeal is successful.

The ruling is just one of a series of problems Lone Star faces in South Korea.

A Seoul court is continuing to probe the fund's purchase of a controlling stake in Korea Exchange Bank in 2003, which has stalled Lone Star's plan to sell off its entire holding.

The fund and its chief in South Korea were indicted earlier this year over allegations of stock price manipulation. South Korean prosecutors are also seeking the extradition of two Lone Star officials.